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Article
Publication date: 20 December 2017

Sudha Mathew, Salma Ibrahim and Stuart Archbold

This study aims to explore the relationship between board governance structure and firm risk. In particular, this study develops a “governance index” based on four aspects…

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Abstract

Purpose

This study aims to explore the relationship between board governance structure and firm risk. In particular, this study develops a “governance index” based on four aspects of the board: board composition, board leadership structure, board member characteristics and board processes, and it examines how the overall index relates to firm risk.

Design/methodology/approach

The study is conducted using a sample of 268 UK firms from the FTSE 350 index over the period from 2005 to 2010. An index is constructed to capture the overall governance structure of the firm. Regressions of the index on three risk measures are examined.

Findings

This study finds that the governance index that aggregates the four sets of board attributes is significantly and negatively related to firm risk. Robustness tests confirm this result.

Research limitations/implications

A large number of studies have explored the relationship between the attributes of corporate boards and firm performance with mixed results. A much smaller number of studies have looked at board attributes and firm risk, but these have either focused on financial sector firms alone or have included only a single or a limited number of attributes. This study, using a broad agency framework, seeks to extend the work on firm risk and board attributes by both expanding industry sectors examined and using a comprehensive set of board attributes.

Originality value

The findings have policy and practical implications for investors, regulators and chairmen of boards of governors to the extent that they inform these constituencies about the set of board attributes that are associated with firm risk. This study is the first to use a comprehensive measure of governance and relate it to firm risk.

Details

Corporate Governance: The International Journal of Business in Society, vol. 18 no. 1
Type: Research Article
ISSN: 1472-0701

Keywords

Article
Publication date: 11 October 2021

MyoJung Cho and Salma Ibrahim

This study aims to examine whether chief executive officer (CEO) pay-performance sensitivity to shareholder wealth is related to the use of non-financial performance…

Abstract

Purpose

This study aims to examine whether chief executive officer (CEO) pay-performance sensitivity to shareholder wealth is related to the use of non-financial performance measures in incentive contracts.

Design/methodology/approach

Using hand-collected performance measure data in a sample of S&P 500 firms across the period 1994–2010, this study investigates the sensitivity of CEO bonus and cash pay to shareholder wealth of firms that use non-financial performance (NFPM) measures of varying types and contractual weights in their bonus contracts along with financial measures (NFPM firms) in comparison to that of firms using financial measures only (FPM firms).

Findings

This study finds evidence that the pay-performance sensitivity is stronger in NFPM firms than in FPM firms. These results are driven by the use of CEO individual goals and operational efficiency. Furthermore, when using environmental, social and governance factors, the pay-performance sensitivity is stronger in terms of accounting performance only. This study also finds that using NFPM enhances pay-performance sensitivity more as their contractual weights increase and as financial risk increases.

Practical implications

These findings are important to stakeholders, and especially regulators in understanding incentive effects of alternative performance measures. This study also sheds light on what types of non-financial measures are better in helping firms align CEOs’ incentives to shareholders’ interests.

Originality/value

This study contributes to prior research on benefits of non-financial information within the context of executive compensation. This study presents original results about the effects of contractual weights of non-financial measures and financial risk on CEO pay-performance sensitivity. This study also presents new insights regarding how different types of non-financial measures affect CEO pay-performance sensitivity.

Details

Journal of Financial Reporting and Accounting, vol. 20 no. 2
Type: Research Article
ISSN: 1985-2517

Keywords

Article
Publication date: 6 November 2017

Talie Kassamany, Salma Ibrahim and Stuart Archbold

This study aims to investigate the occurrence of pre-merger earnings management for a sample of 197 stock- and cash-financed UK acquirers between 1990 and 2009. It also…

Abstract

Purpose

This study aims to investigate the occurrence of pre-merger earnings management for a sample of 197 stock- and cash-financed UK acquirers between 1990 and 2009. It also examines the earnings management behaviour around the change in the Corporate Governance Code in 2003 based on the Higgs recommendations.

Design/methodology/approach

Mean and median accrual- and real-based manipulation are examined in the period before the announcement of a merger and acquisition. These are compared across stock and cash acquirers as well as before and after the implementation of the Higgs recommendations. Logistic regressions are also run to examine accrual- and real-based manipulation across stock and cash acquirers after controlling for variables that may affect the acquisition type.

Findings

The study found some evidence of upward pre-merger accrual-based earnings management by stock-financed acquirers, which is in line with the findings of Botsari and Meeks (2008). Furthermore, no significant changes were found in the post-Higgs period, which indicates that the recommendations put forth by Higgs may not have been successful in mitigating earnings management. The evidence also shows that cash bidders engage in pre-merger real earnings manipulation through lower discretionary expenses, possibly to enhance cash availability for the bid.

Practical implications

The findings in this study confirm earnings management exists around mergers and acquisitions and provide some evidence that the recommendations set out in the Higgs Report do not appear to have mitigated earnings management activities. This is of interest to regulators as well as investors and academicians.

Originality/value

This provides the first analysis in the UK examining the use of real-based earnings management activities by UK acquirers. It also extends prior research around corporate governance changes that occurred in the UK.

Details

Journal of Accounting & Organizational Change, vol. 13 no. 4
Type: Research Article
ISSN: 1832-5912

Keywords

Article
Publication date: 4 April 2016

Sudha Mathew, Salma Ibrahim and Stuart Archbold

The purpose of this paper is to identify the board attributes that significantly increase firm risk. The study aims to find whether board size, percentage of non-executive…

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Abstract

Purpose

The purpose of this paper is to identify the board attributes that significantly increase firm risk. The study aims to find whether board size, percentage of non-executive directors, women on the board, a powerful chief executive officer, equity ownership amongst executive board directors and institutional investor ownership are associated with firm risk. This is the first study that examines which board attributes increase firm risk using a UK-based sample.

Design/methodology/approach

This empirical study collected secondary data from Bloomberg and Morningstar databases. The data sample is an unbalanced panel of 260 companies’ secondary data on FTSE 350 index in the UK, from 2005 to 2010. The data were statistically analysed using STATA.

Findings

The study establishes the board attributes that were significantly related to firm risk. The results show that a board which can increase firm risk is one that is small in size, has high equity ownership amongst executive board directors and has high institutional investor ownership.

Research limitations/implications

The governance culture and regulatory system in the UK is different from other countries. As the data are a UK-based sample, the results can lack generalisability.

Practical implications

The results are useful for investors who invest in large firms, to have the knowledge about the board attributes that can increase firm risk. Regulators can also use the results to strengthen regulatory guidelines.

Originality/value

This study fills the gap in knowledge in UK governance literature on the board attributes that can increase firm risk.

Details

Corporate Governance, vol. 16 no. 2
Type: Research Article
ISSN: 1472-0701

Keywords

Article
Publication date: 30 September 2022

Hend Monjed, Salma Ibrahim and Bjørn N. Jørgensen

The purpose of this study is to examine the association between two reporting mechanisms used by managers to communicate risk information to the capital market: risk…

Abstract

Purpose

The purpose of this study is to examine the association between two reporting mechanisms used by managers to communicate risk information to the capital market: risk disclosure and earnings smoothing.

Design/methodology/approach

This study juxtaposes two competing hypotheses, the “opportunistic” and the “signaling”, and empirically investigates whether one dominates the other for a sample of large UK firms for the period 2005–2015. This study also uses the global financial crisis as an arguably exogenous shock on overall risk in the economy to investigate its effect on managers' joint use of textual risk disclosures and earnings smoothing.

Findings

This study finds that risk disclosure and earnings smoothing are negatively associated. This finding supports that managers with incentives to mask the firm’s true underlying risk through smoothing earnings provide lower levels of risk-related disclosures. This study documents that the trade-off between risk disclosure and earnings smoothing is more pronounced during the global financial crisis period than before and after the crisis period. Further, this study demonstrates a more negative association for firms with higher volatility of cash flows. This negative association is robust to various model specifications, additional corporate governance related controls and an alternative measure of earnings smoothing.

Originality/value

The findings provide new empirical evidence about the association between risk disclosure and earnings smoothing and support the opportunistic hypothesis, especially when firms are faced with increased risk.

Details

Review of Accounting and Finance, vol. 21 no. 5
Type: Research Article
ISSN: 1475-7702

Keywords

Article
Publication date: 26 August 2022

Thi Thu Ha Nguyen, Salma Ibrahim and George Giannopoulos

The use of models for detecting earnings management in the academic literature, using accrual and real manipulation, is commonplace. The purpose of the current study is to…

Abstract

Purpose

The use of models for detecting earnings management in the academic literature, using accrual and real manipulation, is commonplace. The purpose of the current study is to compare the power of these models in a United Kingdom (UK) sample of 19,424 firm-year observations during the period 1991–2018. The authors include artificially-induced manipulation of revenues and expenses between zero and ten percent of total assets to random samples of 500 firm-year observations within the full sample. The authors use two alternative samples, one with no reversal of manipulation (sample 1) and one with reversal in the following year (sample 2).

Design/methodology/approach

The authors include artificially induced manipulation of revenues and expenses between zero and ten percent of total assets to random samples of 500 firm-year observations within the full sample.

Findings

The authors find that real earnings manipulation models have lower power than accrual earnings manipulation models, when manipulating discretionary expenses and revenues. Furthermore, the real earnings manipulation model to detect overproduction has high misspecification, resulting in artificially inflating the power of the model. The authors examine an alternative model to detect discretionary expense manipulation that generates higher power than the Roychowdhury (2006) model. Modified real manipulation models (Srivastava, 2019) are used as robustness and the authors find these to be more misspecified in some cases but less in others. The authors extend the analysis to a setting in which earnings management is known to occur, i.e. around benchmark-beating and find consistent evidence of accrual and some forms of real manipulation in this sample using all models examined.

Research limitations/implications

This study contributes to the literature by providing evidence of misspecification of currently used models to detect real accounts manipulation.

Practical implications

Based on the findings, the authors recommend caution in interpreting any findings when using these models in future research.

Originality/value

The findings address the earnings management literature, guided by the agency theory.

Details

Journal of Applied Accounting Research, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 0967-5426

Keywords

Article
Publication date: 28 January 2020

Muhammad Tahir and Salma Ibrahim

The purpose of this study is to investigate the relative performance of Shariah-compliant companies (SCCs) compared to conventional companies. This study focuses on two…

Abstract

Purpose

The purpose of this study is to investigate the relative performance of Shariah-compliant companies (SCCs) compared to conventional companies. This study focuses on two periods, the first being the recession period of 2007-2010 and the second, the non-recession period of 2011-2014.

Design/methodology/approach

A quantitative approach is adopted using an ordinary least square regression model. The chosen variables are those used by previous researchers in conventional studies of corporate performance. Data are selected from individual companies listed on the FTSE All World Index. This study examines two periods of time: the recession of 2007-2010 and the post-recession years of 2011-2014 to analyse performance measured by accounting returns (return on equity, return on asset and earnings per share) and market returns (stock return and price/earnings ratio).

Findings

The study found that SCCs outperformed non-Shariah compliant companies, in terms of both accounting and market returns during both periods. It was also found that size has a negative effect on performance during both periods. The degree of risk, leverage and growth has no significance in either period, but cash flow from operations has a positive effect on performance in both.

Research limitations/implications

The study could beneficially be extended by the inclusion of corporate governance variables to assess how these affect performance in SCCs.

Originality/value

In contrast to previous research carried out on indices, this study uses data from individual companies listed on the FTSE All World Index. It provides insight into the way Shariah ethics can influence performance and suggests that some of the features could be useful if adopted by conventional companies.

Details

Journal of Islamic Accounting and Business Research, vol. 11 no. 3
Type: Research Article
ISSN: 1759-0817

Keywords

Article
Publication date: 9 June 2020

Hend Monjed and Salma Ibrahim

Evidence on whether firms with higher risk choose a more transparent or more opaque risk reporting strategy in their annual reports is mixed. A potential explanation is…

Abstract

Purpose

Evidence on whether firms with higher risk choose a more transparent or more opaque risk reporting strategy in their annual reports is mixed. A potential explanation is that firms choose an alternative reporting strategy to risk disclosure, namely income smoothing. The purpose of this paper is to investigate the association between both strategies in relation to firm risk levels.

Design/methodology/approach

The authors use a balanced sample of 74 non-financial UK firms from the FTSE100 index over the period 2005–2015, examining the association between firm risk measures and both risk disclosure and income smoothing using a seemingly unrelated regression methodology.

Findings

The authors find that firm financial risk measures are positively associated with both risk disclosure and income smoothing, implying a complementary association. Furthermore, non-risk-related factors are associated with both lower levels of risk disclosure and higher income smoothing, implying a substitutive effect.

Research limitations/implications

The authors do not consider other factors such as managerial optimism, managerial financial incentives and analysts' earnings forecasts which might influence the association between risk disclosure and income smoothing, and hence, this may be a limitation of the current study.

Practical implications

These results are important to regulators, investors and boards of directors who are interested in understanding the alternative reporting strategies that managers select when faced with high risk. The findings signal a need for closer regulatory scrutiny on not only the level of risk disclosure but also the financial reporting choices.

Originality/value

The authors extend the literature on the reporting versus recognition decisions made by managers.

Details

Journal of Applied Accounting Research, vol. 21 no. 3
Type: Research Article
ISSN: 0967-5426

Keywords

Article
Publication date: 21 November 2022

Stavros Degiannakis, George Giannopoulos, Salma Ibrahim and Bjørn N. Jørgensen

The authors propose an alternative robust technique to test for discontinuities in distributions and provide consistent evidence of discontinuities around zero for both…

Abstract

Purpose

The authors propose an alternative robust technique to test for discontinuities in distributions and provide consistent evidence of discontinuities around zero for both scaled and unscaled earnings levels and changes. The advantage of the proposed test is that it does not rely on arbitrary choice of bin width choices.

Design/methodology/approach

To evaluate the power of the test, the authors examine the density function of non-discretionary earnings and detect no evidence of discontinuities around zero in levels and changes of these non-discretionary earnings. As robustness, the authors use pre-managed earnings excluding accrual and real manipulation and find similar evidence.

Findings

The finding using our technique support the Burgstahler and Dichev (1997) interpretation on earnings management, even for smaller sample sizes and reject the theory that discontinuities arise from scaling and sampling methods.

Originality/value

The study provides an overview of those studies that support and those that oppose using “testing for discontinuities” as a way to examine earnings management. The authors advance the literature by providing an alternative methodology supporting the view that the kink in the distribution represents earnings management.

Details

Journal of Accounting Literature, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 0737-4607

Keywords

Article
Publication date: 19 July 2011

Salma Ibrahim, Li Xu and Genese Rogers

Prior research suggests that firms manipulate earnings through accruals to achieve certain reporting objectives. Recently, especially following the Sarbanes‐Oxley (SarbOx…

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Abstract

Purpose

Prior research suggests that firms manipulate earnings through accruals to achieve certain reporting objectives. Recently, especially following the Sarbanes‐Oxley (SarbOx) Act, researchers have turned their attention to real account manipulation as an alternative. However, there is no evidence on whether the likelihood of being detected by outsiders is different for firms using these alternative manipulation methods. The purpose of this paper is to examine this research question in the context of seasoned equity offerings (SEOs).

Design/methodology/approach

First, the authors compare SEOs to a matched sample of non‐SEOs to document income‐increasing manipulation. Next, they identify SEOs that prompt lawsuits and compare sued and non‐sued firms to determine whether using a particular method of manipulation is more likely to be detected and associated with litigation.

Findings

The authors find evidence of income‐increasing accrual and real manipulation for SEOs in the year prior to the offering in the pre‐SarbOx period, and find some evidence of a shift to real account manipulation post‐SarbOx. The authors examine the subsequent litigation pattern of these SEOs, and find that firms that are subsequently sued have a higher prevalence of income‐increasing discretionary accruals when the lawsuit allegations involve accounting issues. Following SarbOx, investors are paying less attention to accrual manipulation through accounts receivable and there is more scrutiny of real account manipulation.

Originality/value

The implication in this paper is that firms that engage in income‐increasing earnings management are more likely to be sued when they engage in accrual manipulation while other forms of manipulation may be less understood. This finding is important to investors and regulators.

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